No IPOs In 2Q08, I Told You So

Finally “the market” is talking, and I knew it would have more impact than my blog.

Years back we suggested the diminishing value of micro-economic innovation (or technology silos) and a stubborn VC club that still operates under old-fashioned principles (see “In Search of the Economist VC” written in 2005, “10 Investment lessons learned”) as the main reason for this decline.

Alex Haislip on PEHub agrees:
“The VC industry is laboring under a set of outdated assumptions, a structure optimized for conditions no longer applicable and an unwillingness or inability to embrace the tectonic change it is undergoing. The hand wringing about various short-term shocks (such as skittish investors) that sunk the second quarter’s IPOs misses any serious discussion of the long-term systemic shifts that many VCs have failed to act on.”

What needs to change is:

1/ VCs need to start investing in businesses rather than technologies
No one outside of Silicon Valley cares about Web2.0, Mashups, UPnP etc unless it proves to deliver a unique experience, deliver substantial competitive advantage or significant cost savings to customers. Indeed, back to fundamentals.

2/ VCs need to embrace different investment models
We need a long-and-short and high-and-low in technology investments, and everything in-between. With a business-centric view of the world comes an investment model that is tailored to that business. Every unique company ecosystem has unique financial requirements. History has shown that not all businesses benefit from low-ball investments; the majority of seed-stage deals go for less than half the price of a regular house in Palo Alto. The superficial categorization of businesses in technology categories is turning new business opportunities into (forced) commodities.

3/ VCs need to change how they find deals
The problem starts at first encounter. The Ivy League kids fresh out of business school that are the first point of contact for most entrepreneurs are just not capable and experienced enough to spot disruptive technologies that have a macro-economic impact. A first time pilot right out of school is not allowed to take the helm of a commercial airliner, neither should an MBA graduate be allowed to veto an investment. False negatives are rampant and deflating overall market value. We need unconventional companies, not more conventional ones.

But the great thing about the demise of the current VC model is the need to create a new one that, in turn, spawns a new more exciting asset class.

Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

Click to access the login or register cheese